RFC: (POP) Arf Variable Interest Notes SPV

Centrifuge Governance Proposals
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Overview

Company Information

  • Business Name: Arf Financial GmbH
  • Current AUM: n/a
  • $ Volume of Transactions Completed Last 12 months: c.$400m loan provided
  • Target Launch Date: Nov 1, 2023
  • Location and Team Size: Switzerland, 40
  • Years in Operation: 4

What does your company do?

Arf is a regulated liquidity platform, offering digital asset-based working capital credit lines to licensed financial institutions worldwide.

Arf Credit Line, live since November 2022, revolutionizes the way cross-border payments are made by providing onchain liquidity solutions for financial institutions. This initiative facilitates immediate USDC-based settlements, eliminating the need for pre-funding accounts globally (currently resulting in $4 trillion worth of locked up capital worldwide). This solution offers receivable-backed lending onchain and tokenizes cross-border payment orders, setting a new standard for transparency and traceability in the industry. Arf Credit Line, proven as one of the strongest use cases of RWA tokenization, is designed to increase access to liquidity for regulated institutions from all around the world by leveraging web3 transparency.

Please find the link to our previous post here.

How do you differentiate yourself from competitors?

Our unique technology advantage results from:

  • Being the first fully customized gap financing product for cross-border payments
  • First-of-its-kind RWA use case which provides not only cost and efficiency but also revenue increase potential by disrupting current fiat solutions
  • Capability on interoperability on 10 chains (Ethereum, Stellar, Avalanche, Arbitrum, Algorand, Tron, Flow, Solana, Hedera, Polygon)
  • Developing our own on-chain transparency initiative to talk with other DeFi pools, coupling value with on-chain information (1)
  • Having the right compliance for FIs to use Arf as a settlement and liquidity platform leveraging digital assets (2)
  • Native on and off ramp with banking relations in the US and EU. UK, HK SG will follow which allows FIs to use stablecoins in a fully compliant way and 1:1 without requiring any crypto exchange wallet to wallet transfers

1. Arf is in the process of launching its on-chain transparency protocol to be the underlying information source for all the DeFi lending protocols that it is working with. In addition, the information stored in blockchain will be used in conjunction with the supporting documentation for periodic audits in the real world (Mazars in Switzerland). In short, Arf creates multiple ERC721’s during the loan process (Request NFT, Funding NFT, Credit NFT and Repayment NFT) which are all contained within a Receivable ERC1155 NFT. This way, a DeFi protocol may just plug Arf’s Receivable NFT and then track the complete loan lifecycle.
2. VQF SRO Member Nr. 101012. Arf receives Swiss regulatory approval - arf | Borderless Finance Unlocked

Company Financing:

  • Equity raised: We had two rounds thus far raising $4m in total - $1m raised in pre-seed in June 2021 and $3m raised in seed in November 2022.
  • Debt funding: Arf has secured US$10m from Stellar and US$4m from Huma.

Revenue model:

  1. APR. Arf’s main source of revenue is generated via net interest margin (i.e. rate charged to customers vs. our lenders).

  2. Fees. Arf may charge various fees going forward (such as origination and additional fees)

Professional Partners:

  • Key Professional Partners (legal, accounting, operational, technical, structuring):
    • Arf works with a Swiss attorney-at-law on legal matters. The counsel is setting up a bankruptcy-remote SPV in Liechtenstein for Arf to be able to scale faster and meet the legal discipline of LPs that are due to lend to us from various jurisdictions going forward.
    • Arf is subject to periodic audits by Mazars based in Switzerland.

Capital

Outline why DeFi is important to your business strategy

  • The visibility we are introducing to the cross-border payments sector makes DeFi an imperative part of our equation. Due to the intricate nature of remittance flows, typical traditional lenders to FIs do not track transactional information to understand corridors served and nature of transaction (B2B, B2C etc.). This leads to turned-down deals and often times prolonged processes while onboarding. Arf provides the means for the investor community and the liquidity providers to track transactional data onchain and opt in/out of providing capital to finance certain payment types and even corridors. This is a category-defining novelty and will reshape the industry.

Articulate why Centrifuge’s community and protocol is a fit for financing

  • Centrifuge has a state-of-the-art pool architecture that allows interested parties to launch structured pool tranches in different terms.
  • Its governance structure will enable Arf to rapidly build presence, scale and raise brand name across a varying base of institutional investor.

Structure: Risk & Terms

Please explain the key risks inherent in this opportunity:

  • Default risk (lowest): Our default % in the last 11 months being alive has been 0.00%. Default risk is extremely low due to reasons stated below:
    • The default rate of financial institutions was only 0.23% in 2020, 0.14% in 2021 and 0.28% in 2022 according to S&P. We expect the FI default rates to hover around 0.25% levels in the next few years. Our business design based on pre-collected money gives us comfort that we will not be experiencing a significant problem on counterparty defaults.
    • We only onboard licensed financial institutions. Many of our potential leads that demand our service go through a well-vetted risk committee / full compliance process and fail to be our customers if they are not able to meet our eligibility criteria.
    • An additional layer of comfort is our proprietary rating model, which was developed by gathering financial information of financial institutions that receive a rating from Big3 (S&P, Moody’s and Fitch) and the ratings assigned to each. Then we created a classification model that predicts the rating of the client with that given information. Features used in the model can be combined into 4 categories (profitability, efficiency, leverage and liquidity) with risk costs as an adjustment factor.
  • Fraud risk (very low): We provide the liquidity to the payout partner of the licensed FI, not to the licensed FI, similar to supply chain financing flows. For a fraudulent activity to occur, the two parties have to be in a concerted effort to do so. Both parties’ licensed would be terminated in such a case.
  • Late repayment risk (very low): We fund our clients after reviewing daily/weekly transactional data provided and we receive repayments on a daily basis. Maximum repayment period for each facility is 5 days. Any delays in repayment can be tracked on-chain by the operations team.

Pool

Pool TVL at Launch:

1 mn USDC

Pool TVL at 1 Year:

25 mn USDC

Asset Type(s)

Unsecured loans backed by receivables, where these receivables consist of valid cross-border payment orders coming from ultimate senders.

Expected Default Rate

We expect the FI default rates to hover around 0.25% levels in the next few years. The default rate of financial institutions was only 0.23% in 2020, 0.14% in 2021 and 0.28% in 2022 according to S&P.

Arf has not experienced a default since its launch. We have a default management program and currently we are discussing how to obtain rights on receivables of the clients in such events.

Expected borrowing rate on senior tranche (on-chain)

Junior and Senior Tranches. Centrifuge pool will be part of the Senior Tranche receiving 10% interest rate (TBD with Centrifuge Governance / Community). On the Junior Tranche, we expect to receive new funding in c.13% level.

Expected lending rate to end borrower (on- or off-chain)

Varies depending on risk profile and volume.

7 Likes
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Hi @alierhat, thank you for your POP submission!

I edited the title of your post, moved it to the appropriate section of our forum and added relevant tags so it is in line with what is described here.

Changes to the POP were recently approved by the DAO so if you wrote your POP prior to that, you might have missed it, so no worries.

According to the template for POPs, there are some things missing in your submission. Mostly information from Section 4: Pool; like:

  • Pool TVL at Launch
  • Pool TVL at 1 Year
  • Average Asset Maturity

Can you please add this information in your POP so the Centrifuge DAO has the necessary information to give a proper feedback? Thank you.

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Hi @alierhat Your post is very informative and intriguing. Arf’s business use case is interesting, simple and efficient use case of blockchain that makes sense. I have a few questions about your company and its operations, given the interesting nature of your work:

  1. What is Arf’s primary revenue model, and how does it generate income? Do you offer your clients any other services?
  2. How does Arf ensure it remains compliant with financial regulations in such a wide area of jurisdictions, especially considering the global nature of your operations? What agency are you regulated by?
  3. In addition to the historical default rate of financial institutions, what specific risk management practices does Arf have in place to assess and mitigate risk?
  4. How do you address the potential volatility with stables and fiat currency flux? Is Arf only USD/USDC?
  5. Do you have a breakdown of Arf’s loan portfolio industries or geographic regions? What is your max single borrower exposure? Would love to get a better understanding of the size of your customer per geographic region
  6. Are you able to share some of Arf’s key borrowers and partners in the financial industry? Would love to know more about those involved :slight_smile:
  7. I saw your dune dashboard and it looks great. Is Arf on any other chains?
  8. How does Arf ensure the security of digital assets and funds under its custody? Are there insurance or custody arrangements in place to protect against potential losses or theft from contracts or wallets?

I know its a lot of questions, thanks in advance. Looking forward to learning more!

1 Like
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Hi @sirj
Thank you for your kind words - it is always good to hear positive feedback from people that understand which domains the transformative technology behind blockchain can create true impact.

  1. The primary revenue source is volume based prices translating to NIM with our cost of funding for borrowed sums is deducted.
  2. We are currently a member of and regulated by VQF in Switzerland which enables us to conduct our stated operation in any non-sanctioned country and without any limits on the amount.
  3. We developed our own proprietary risk model for default, fraud and late repayments. We have a default management program and arrangement with collection houses.
  4. Arf is only USDC/USD.
  5. All are licensed financial institutions engaged in cross border payment activity - maximum single borrower exposure is 30%.
  6. No, we cannot disclose our borrower / partner information due to confidentiality obligations.
  7. Thank you - we agree that our performance has been stellar. Arf is interoperable on 10 chains (Ethereum, Stellar, Avalanche, Arbitrum, Algorand, Tron, Flow, Solana, Hedera, Polygon) and launching on one new chain.
  8. On the custody front, we are using Circle’s custody directly. In the scenario of an attack to our infra, we are carrying minimal risks. Due to the nature of our business, all our AuM is actually transitionary.
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Hi @alierhat, great project.

Three questions:

  1. At the beginning of your presentation you mention that you already provided 400m in loans. How did you finance this volume?

  2. Is this correct that you charge your clients 13% and your offer to pool investors is 10%?

  3. Which other emerging companies do similar approaches like Arf?

Thanks!

1 Like